Commissioner of Income Tax vs Vallabh Yarns (P) Ltd.

The Revenue has preferred this appeal u/s 260A of the IT Act, 1961 (for short the Act) against the order passed by the income tax Appellate

Tribunal, Chandigarh Bench A, Chandigarh (in short the Tribunal) in ITA No. 226/Chd/2009, for the asst. yr. 2004-05 claiming that the following

substantial questions of law arise in this appeal:

(i) Whether on the facts and in law, the Hon''ble Tribunal was justified in holding that the CIT has exceeded his jurisdiction which is not permissible

under the provisions of the Act, ignoring the fact that the order of the AO passed u/s 143(3) on 15th Dec, 2006 was erroneous insofar as it was

prejudicial to the interest of Revenue?

(ii) Whether on the facts and in law, the Hon''ble Tribunal was justified in observing that the income earned on job work basis amounts to

manufacturing ignoring the fact that the income earned on account of fabrication has no nexus with the business of industrial undertaking of the

Assessee company?

(iii) Whether on the facts and in law, the Hon''ble Tribunal was justified in observing that the assessment was framed with due application of mind

whereas the AO has nowhere discussed the issue under consideration in the assessment order?

(iv) Whether on the facts and in law, the Hon''ble Tribunal was justified in viewing that the expenditure incurred on repair which included the cost

to be replaced against which insurance was claimed, the only excess amount, if any, can only be disallowed ignoring the fact that the insurance

claim receipt has no nexus with the business of industrial undertaking and is not eligible for deduction u/s 80-IB?

(v) Whether on the facts and in law, the Hon''ble Tribunal was justified in the Assessees case restricting its decision to the justification of the

jurisdiction assumed u/s 263 of the Act and not deciding the issue on merits of the case?

Briefly stated, the fact of the case are that the Respondent-Assessee company derives income from manufacturing and sale of finished knitted

fabrics and readymade garments. The Assessee filed return of income for the asst. yr. 2004-05 on 21st Oct., 2004 disclosing taxable income of

Rs. 34,57,734. The return was processed u/s 143(1) of the Act on 14th Jan., 2005. The assessment u/s 143(3) of the Act was finalised on 15th

Dec, 2006 at income of Rs. 36,43,252. The AO had allowed the deductions u/s 80-IB of the Act to the Assessee and disallowed deduction on

receipts of lease rent on machinery and interest income.

The Commissioner of income tax-I, Ludhiana (for short the CIT) in exercise of powers u/s 263 of the Act came to the conclusion that the

Assessee was not entitled to deduction u/s 80-IB on the following amounts:

(i) Fabrication Rs.2,98,25,810

charges

(ii) Insurance Rs.1,01,129

claim

Rs.2,99,27,739

Accordingly, the CIT while invoking the powers u/s 263 of the Act concluded that order of the AO was erroneous and prejudicial to the interest of

Revenue. The CIT disallowed the fabrication charges on the ground that the Assessee had done the job work for others and was, thus, not entitled

to deduction u/s 80-IB of the Act. The insurance claim was also held not to be admissible for deduction u/s 80-IB as the same had no nexus with

the business of industrial undertaking.

The Respondent-Assessee being aggrieved against the order of CIT passed u/s 263 of the Act invoked the appellate jurisdiction of the Tribunal.

The Tribunal allowed the appeal of the Assessee observing that fabrication charges on account of job work done by the Assessee for others

amounted to manufacturing and also that the Assessee had not received any real income on account of insurance claim which could be disallowed.

The Tribunal, thus, concluded that the order of the CIT passed u/s 263 of the Act was unsustainable as the assessment order dt. 15th Dec, 2006

passed by the AO was neither erroneous nor prejudicial to the interest of Revenue.

The Revenue being aggrieved against the order of Tribunal preferred the present appeal.

The issue for consideration in this appeal is whether the order passed by the CIT u/s 263 of the Act was justified or not. In order to arrive at the

said conclusion, it would be worthwhile to delve on the merits of the issue as well.

As noticed earlier, CIT had exercised revisional jurisdiction in respect of fabrication charges on account of job work done for others and

insurance claim.

Learned Counsel for the Revenue could not point out any error in the order of the Tribunal whereby the fabrication charges received by the

Assessee on account of job work done for others was held to be on account of business of industrial undertaking of the Assessee, more

particularly in view of the decision of this Court dt. 5-12-2008 in IT Appeal No. 543 of 2008 CIT v. Impel Forge & Allied Industries Ltd. (2010)

326 ITR 27 (P&H).

Further the Tribunal while allowing the appeal of the Assessee regarding insurance claim in para 5 of the order had recorded the following

finding:

On the issue of insurance charges, it was explained by the Assessee that there was some damage to the machinery and insurance was given to the

Assessee company as repair expenses. It was contended that even the insurance charges are denied still no prejudice is caused because still there

is negative figure if the impugned amount is denied because ultimately nothing is to be disallowed. We are of the view, that the expenditure incurred

on repair which included the cost to be replaced against which insurance was claimed, the only excess income, if any, can only be disallowed and if

there is any real income from insurance company, can only be disallowed. For this proposition, the Assessee is fortified by the decision in the case

of CIT v. G.K. Steel Tubes (P) Ltd. (2005) 27 IT Rep 349 (P&H). Even otherwise, in principle, the learned CIT itself agrees that Assessee is

doing the activity of manufacturing. The learned CIT, on the other hand, itself denied the deduction u/s 80-IB and did not ask the AO to re-

examine the claim of the Assessee. Such an order cannot be sustained. In view of these facts, this appeal of the Assessee is allowed.

The Tribunal had recorded that expenditure incurred on repair which included the cost to be replaced against which insurance was claimed, the

only excess income, if any, can be disallowed. In other words, on facts, the Tribunal came to the conclusion that Assessee had not received any

real income on account of insurance claim which could be disallowed. The said finding has not been shown to be erroneous or perverse which may

warrant interference by this Court. Accordingly, no substantial question of law arises in this appeal which requires consideration by this Court.

The appeal is consequently dismissed.